Most buyers want to purchase at the lowest possible price. However, price must be balanced against quality. An inconsistent rental income and an uncertain exit strategy will quickly sour a deal that seemed too good to be true.

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In good times and in bad, the lowest prices will always be available in low income areas with poor transport links, low owner occupancy, high levels of foreclosures, high levels of delinquencies on community fees and lots of deferred maintenance.

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Chasing a low purchase price with a high rental yield is what I consider to be a “too good to be true” strategy. Your rental income isn´t going to be very reliable in these kinds of areas. Tenants here are less creditworthy, less responsible and more transient. This will lead to high vacancy periods, high management fees and high repair costs. Finding a profitable exit strategy for that kind of property five years time will be difficult if not impossible.

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The best investment locations, in good times and in bad, are those closest to the best schools, jobs and amenities where young families and professionals rent, live and buy property. For these reasons, they will never be the cheapest properties on the market, but they will certainly be the most stable.

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A person seeking a reliable rental income and a solid exit market should choose properties with the following characteristics:

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1. FHA financing available to owner occupiers

2. Low foreclosures levels

3. High owner occupancy and low vacancy levels

4. Low levels of delinquencies and deferred community maintenance

5. A satisfactory HOA reserve to cover future maintenance work

6. Close to quality schools and major employers

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Junk mail filter

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If you are receiving a dozen emails every week with deals that all look great - just ask the seller to confirm the above and you´ll very quickly find out which ones are duds.

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The six bullet points above are obvious, anybody could come up with them after a few minutes thought. The trick is finding properties that match these characteristics and securing them at a competitive price. That´s not so easy and not many people are doing it.

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There are different levels of risk in real estate, and plenty of ways to earn a living from it. Not everybody will agree with my take above. That´s ok - one size doesn´t fit all in this game.

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However, if you happen to agree with me that the most viable strategy is to buy in locations where people pay their rent and bills on time, where the amenities are well maintained, and where banks are already lending to owner occupiers, then you´re going to love our next product launch. See http://www.torcana.com/newsletter-41.htm for further details.

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Tags: distressed property, House price statistics, reliable rental income, Torcana
Posted in General Opinion, USA Property |

In my previous newsletter, I outlined my thoughts on the EU/US crisis and why I felt business in Florida will carry on regardless.

Here are ten reasons why I am still betting on Florida real estate:

1. As of June 2011, there were 10,559 homes available to purchase in Orlando though the multiple listings system (MLS). This is 35% lower than the June 2010 inventory (16,304).

2. If you´re wondering why good deals seem harder to come by this year compared to last year, then look no further than the fact that Orlando condo inventory is down a dramatic 54% year on year. There are only a few hundred available to purchase.

3. The median sales price of a normal (i.e. non-foreclosed) property has increased an incredible 40% year on year, from $112,000 (£68,225) to $158,000 (£96,250). There has been a corresponding drop in the numbers of bank owned properties available in the open market.

4. The current pace of sales is equivalent to just 4.3 months supply, the lowest since 2005. A lot of prospective buyers will say that they are waiting for the bottom of the market. In my view they’ve already missed it.

5. One in five Canadians are interested in US property, according to a new survey by BMO Bank of Montreal. Aside from the Canadian dollar appreciating 18% against the greenback in the past five years, the house prices in the locations they tend to favor (Tampa, Phoenix, Miami) have fallen far faster than the US average.

6. Between March 2010 and March 2011, almost a third of all Florida sales were to foreign buyers, up from 10% in 2007 (NAR). Generally speaking, the USA is still by far and away the largest recipient of foreign direct investment.

7. Orlando´s median home price (which is a good barometer for Florida as a whole) is now $94,950 (£57,850), the lowest level since 1997. Reserve at James Island units are available at this exact price, but I can assure you the quality and location is far above the average.

8. According to a recent report from the Harvey University Center for Housing Studies, 16 million new housing units will be needed to meet population growth and shifting demands. That would mean household formation, currently at 500,000 per year, will need to reverse its recent trend and get back to the 1,000,000+ per year we witnessed in the years previous to the financial crisis.

9. There is going to be a surge in demand for smaller homes, as an estimated 3.8 million baby boomers will be looking to downsize in the next decade. There are an estimated 50 million baby boomers in total and a disproportionate number of these will be attracted to the warm climate, low cost of living and quality of life of Florida. Immigration growth will also continue to stimulate demand.

10. Despite all the turmoil in the markets, there can be few who doubt that Florida is a diverse, wealthy and resilient economy with a safe and secure legal system that has been protecting foreign buyers for decades.

Kind Regards

Colin

Tags: distressed property, Florida Property Investment, House price statistics, Torcana
Posted in USA Property |

The market crash in 2006-2007 resulted in the dramatic falls in property prices among many industrialised nations, but as the graph below illustrates, prices in the USA have both fallen further and stabilised for longer than other major nations.

Property needs to be considered above all at micro levels - you need to know the individual neighborhoods very well. However some important nationwide trends include:

• - The ratio of house prices to rents is now well below its pre bubble level
• - Vacancies are at a three year low
• - Analysts expect rents to rise by 4% this year and next (The Economist)
• - New foreclosures were 18% lower in Q1 2011 than Q1 2010
• - The US economy added 600,000 new jobs between Feb-April and 1.3m new jobs in past 12 months. That is the rough equivalent of the UK adding 120,000 new jobs in 3 months.
• - In Q1 2011, for the first time in 4 years, more mortgage borrowers caught up with their payments than fell further behind.

What are your thoughts?

I´m very interested in your thoughts on the issues and trends discussed in this blog post. Do you agree or disagree with my take on the current market?

Regards

Colin

Tags: distressed property, House price statistics, investment property sales, Torcana
Posted in General Opinion, USA Property |

Florida - changes between 2008 - 2011

When Torcana first entered the market for distressed real estate three years ago, there was a wide selection of properties available in what I would consider the “comfort zone” of most investors. For $60,000 - $100,000 you could purchase a tenanted and well maintained 1, 2 or a 3 bed condo in a decent middle class neighorhood.

We pride ourselves in our ability to sniff out a bargain and we sold a couple of hundred prime units matching the description above in well established communities like Mosaic at Millenia, Arbor Lakes, Sabal Point & Siesta Lago. A mixture of direct competitors, pension funds, specialist property funds and high net worth individuals all snapped up tens of thousands more in (broadly) similar communities and price ranges.

When you combine that substantial investor activity with improved economic conditions generally, you are are left with a severe tightening of this market segment. While some news outlets are still publishing stories about new foreclosures and price falls, today´s facts are a lot more relevant than yesterdays headlines.

The basic truth is that the number of properties being purchased every month far outnumbers the combined total of new foreclosures plus new builds becoming available.

Recent official statistics confirming inventory levels at 7 year lows (4.8 months worth) and vacancy rates at 3 year lows enhance this argument further.

Tags: distressed property, House price statistics, Torcana
Posted in USA Property |

Tags: distressed property, House price statistics, rent ratios, Torcana, undervalued property
Posted in General Opinion, USA Property |

“The price of copper has increased by 50% in the last 9 months“ probably isn´t something you´re likely to hear in your local pub on a Friday night.

You would if you were stuck with a nerd like me, but as far as investments are concerned, people are much more likely to be talking about the price the house around the corner was sold for and the estimated loss/profit that the seller made.

Property is unique in many respects, and the fact that people gossip about it more than any other investment is just one of them. It is also unusual in that prices are set by local transactions - one absurd bid on a house can push up the value of every other property on the same street.

Culture also has a major influence (Germans like renting, Americans like owning), as do property taxes (very high in Spain, reasonably low in Britain). The lax property laws and politics of Ireland´s outgoing government made a hefty contribution to the recent boom (and was a major reason the incumbent Fianna Fail party were hammered in recent elections).

Less obvious factors like demography (a steadily increasing population has always underpinned US housing investment from institutional buyers) and geography (limited space in Hong Kong, lots of space in Phoenix) can also have dramatic impacts over time.

You can push, but you can´t direct it (Bono)
Efforts to control the property market can often have unintended side effects. Spanish first time buyers have always had to deal with very strict mortgage lending laws, and yet the same banks that were required to ask for 25% deposits were given free rein to finance rampant speculation on behalf of developers. On the other hand, German banks who couldn´t lend to local developers invested in subprime mortgage bonds in America instead.

Go figure.

Regards

Colin

Tags: buyer attitudes, distressed property, Florida Property Investment, House price statistics, Torcana
Posted in General Opinion |

During the boom times, I used to attend 15-20 property exhibitions per year. I can´t remember anybody at these shows advocating a buy and hold strategy. It was all about buying offplan and then selling for a big profit shortly after completion. Many a taxi driver, publican and dinner party host could be heard advocating a “buy now before prices go even higher” approach.

In hindsight, that turned out to be a pretty risky way to try and make some money. It was also miles away from the traditional methods advocated by old hands.

Somewhat ironically, it is easier to make money purchasing real estate now even though many might instinctually prefer to wait until the opportunity has passed.

While I´m convinced that making a profit by buying real estate is both easier and safer than it was 5 years ago, it doesn´t happen quickly and it certainly doesn´t involve borrowing lots of money.

There´s no great secret here, the strategy couldn´t be simpler. Here goes: buy a highly discounted property with cash (no interest rate risk), in an established location, earn a nice income, treat your tenants well, and hold onto it for as long as you can. Consider selling only when the statistics and your gut tell you the market is showing signs of another property bubble.

I´ll be the first to admit that this isn´t a particularly exciting plan, but you know what? It works. Very well. Just look at the table below. All I´ve done is illustrate the net income that can be earned from any half decent three bed condo in Florida.

Apart from earning 150% of your purchase price, you still own a property outright with no mortgage that you bought for 35 cents on the dollar.

Before any of you young guns reading this dismiss such as strategy as unsuitable, consider what the great American economist Paul Samuelson said, “investing should be more like watching paint dry or watching grass grow. If you want excitement, take $8,000 and go to Las Vegas“.

It´s a numbers game

Let the numbers tell you when to buy and let the numbers tell you when to sell. I know a large bulk of our readers do this instinctually. A high rental yield with no gimmicks is one of the surest signs that a property is well priced.

The opposite is also true - a low rental yield probably means it´s overpriced. If it´s a combination of low rental yields and high capital appreciation - watch out, because you´re probably in the middle of a property bubble.

How do we know when the supply / demand balance is in our favour?

Taking Orlando as an example (because that´s where my company is most active), I think it is reasonable to assume that a good time to buy is when a supply glut has moved towards balance and the local house prices don´t reflect that yet.

Guess what? It´s happening now. According official figures from the Orlando Regional Realtors Association, the supply of available properties is now at a 5 year low. Unlike 2007, 2008 and 2009, average sales prices actually went up in 2010 across Orlando. I wrote a blog about this recently.

It´s a perfect storm (but the forecast says it´ll brighten up soon)

I´ve never seen conditions more perfect for buying real estate in the US. In the areas we sell - prices are reduced by 65-70% compared to what they were 4 years ago - way below construction cost. Supply was extremely high, but it is reducing fast.

Recent figures from the Census Bureau and The Economist (see graph opposite) confirm that homeownership rates have decreased from 70% in 2004 to 66.5% today - that means more renters. In fact, there are more renters now there has been for almost 6 years. When the number of renters is increasing faster than the supply of properties, rents should increase.

According to a Marcus & Millichap report (they´re one of the largest brokerages in the USA), exactly that has happened. The shift from homeownership to leasing should boost the local market’s average apartment asking rent to $864 by year’s end, a 2.2 percent increase. In the best middle class neighbourhoods it will increase by considerably more.

What are you thoughts on the Buy and Hold strategy?

Regards

Colin

Tags: buy and hold strategy, distressed property, Florida Property Investment, House price statistics, Torcana
Posted in General Opinion, USA Property |

A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? You´ll lose your home and your good credit history will be badly damaged.

If you dig a little deeper, the logic becomes apparent.

Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for $260,000 and he took out a $230,000 mortgage which is costing $1500 per month to service. He has a nice job and has no problem paying $1500 per month.

However, he knows that half a dozen identical 3 bed condos in his community, which weren´t sold in 2006 have recently been purchased by cash buyers for $99,900 each and they´re renting out for $1000 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves $1500 per month.

It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays $1000 per month to his landlord. He won´t get a mortgage or a car loan for 3-7 years, but he doesn´t particularly care as he´s done nothing illegal, he´s free of that huge 20 year debt and he doesn´t mind renting for a while.

The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.

In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and won´t think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.

What are the consequences of these defaulters?

As you might expect, lenders in the USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people don´t have an incentive to walk away. For example, they´d like it if a strategic defaulter couldn´t get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.

It´s not easy to prove strategic default though - you´d need to show beyond a reasonable doubt that the person wasn´t suffering financial hardship when they stopped paying their mortgage. Imagine a bank trying to do that to 5000 customers. Better still, imagine a state court system trying to handle 10 banks doing it to 50,000 customers.

Additionally, nobody knows what percentage of people are defaulting because they´re broke versus people defaulting because they don´t feel like repaying a debt bigger than the value of their home. Come to think of it, there isn´t even an official definition for a strategic defaulter.

One thing is for certain though. With the previous chaos in the market abating and the supply of distressed stock dwindling (see graphs above), they represent one of the few ways which will continue to generate discounted houses that investors can pounce on. The flip side is that if it becomes too big a problem, I think loop holes will be closed and people will no longer be incentivised to do it.

Don´t expect the authorities to announce a date for closing these loopholes either - they´ll just do it and tell you afterwards. Otherwise, people would simply rush to default before a deadline.

So, I think I can safely predict that when banks finally restructure their property portfolios and the levels of foreclosures slow to a manageable trickle, they´ll start lending to normal people again. That´s when property prices in the popular areas will start increasing and that could conceivably happen this year.

Regards

Colin

Tags: distressed property, Florida Property Investment, House price statistics, Orlando Foreclosures, profitable strategies, strategic default, tenanted property florida, Torcana
Posted in USA Property |

In 2006, the property market in Florida all but collapsed. Investors who were expected to continue their property buying binge left the market en masse. A depressed economy and rising unemployment also ensured that local first time buyer demand took a nose dive.

When this demand dried up, the builders who couldn´t service their loans to the banks had their assets seized. The banks packaged these up and mostly sold them to pension funds, hedge funds, big corporations and high net worth individuals. The banks that couldn´t sell quickly enough became insolvent and were put out of business by big insurance companies and the FDIC. Big insurance companies who insured too many banks with a high property exposure also went bust. From 2006-2008 it was bloody mayhem.

Things have been somewhat calmer since then. With prices discounted by 60-70%, demand picked up rapidly and the existing housing stock fell dramatically. New foreclosed properties were still coming into the market in significant numbers in 2009 and 2010, but they were very quickly absorbed by the market. The two graphs below for the Orlando housing market illustrate this quite clearly.

Tags: distressed property, distressed property developers, Florida Property Investment, House price statistics, Orlando Foreclosures, Torcana
Posted in USA Property |

Florida has been very good to Torcana his year with many successful launches under our belts (with Mosaic, Arbor Lakes & Sabal Point being the standouts).

More will follow in early January as we continue to source high end condos with bulk discounts in affluent middle class areas that are pre tenanted by local professionals. Net yields will generally be 8% and prices 70% below peak rates.

Early in the new year we will bring other US products to the market including a variety of bespoke services for investors seeking to purchase multiple units (please get in touch if you´d like to know more).

Lies, damn lies and statistics (Disraeli)

I´ve had US housing numbers coming out my ears this year and I´m going try and ignore them for the next two weeks. For those who don´t want to watch Harry Potter or Willy Wonka on television, there´s no shortage of housing statistics on the USA market available online.

I´ll just give you two graphs in this newsletter though, one which shows the inventory in Orlando over the last 3 years and other which shows new contracts issued in Orlando during the same period.

Off the top of my head, I can think of half a dozen Housing Ministers in the EU and elsewhere that would sell their grannies for stats like these.

Tags: distressed property, Florida Property Investment, House price statistics, tenanted property florida, Torcana
Posted in USA Property |